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Moreover, the spread of resale price maintenance would substantially facilitate price leadership and uniform pricing in the marketing of similar or substitutable products by competing manufacturers. Such manufacturers, in order to maximize their profits by volume sales, would endeavor to set the price or price range high enough to cover the operating costs and a profit to most of their customer retailing firms. It could be expected that the fixed retail price would be geared not to the profit needs of the most efficient or even the average efficient retail firm, but to the profit needs of the less efficient or marginal firm.

Iudependent distributors probably would be seriously disadvantaged in a volatile market condition. Under a system of owner pricing, those purchasing for resale would not be free to adjust quickly sales prices of their identified pricemaintained merchandise to meet the competition of vertically integrated firms, which by their nature have instantaneous control over prices of own-brand merchandise at their outlets. Thus many stores that depend on merchandising a variety of brands which they do not own or control would be handicapped, and this group includes many small independent stores.

Competition is the mechanism in a free enterprise system which directs the employment of manpower and investment toward the maximum output and efficiency which in turn contributes both to lower prices and growth in the volume of goods and services produced. A faster economic growth rate for the Nation is universally recognized as necessary to our well-being, and much study and effort are being devoted to the best means of its realization. Resale price maintenance would result in lower rather than higher growth rates.

As a result of the higher prices and price rigidities that would result from a new and more affirmative national resale price maintenance law, consumers would be penalized. Price competition is essential for pricing which is responsive to the play of market forces. Such competition maximizes consumer purchasing power and permits consumers to enjoy higher levels of living.

In purchases in the retail market, the consumer buys not only the physical product itself, but a varying amount of other associated utilities and added values such as those made available to him by location and decor of the establishment, credit, delivery, personal service, etc. When a consumer chooses among the many outlets that may sell a particular product, he has a right to expect that the retail prices will reflect the cost of the particular combination of these utilities which he prefers. Instead, with the passage of an affirmative national fair trade law, he would be faced with uniform and somewhat higher prices for an increasing number of products, regardless of the comparative services ineluded.

The provisions of this bill would constitute an affirmative endorsement and authorization by the Federal Government of resale price maintenance throughout the entire distributive process, rather than acquiescence by deference to State authority under existing laws in States which authorize fair trade.

It is noted that the misrepresentation by the seller with intent to deceive purchasers is already regulated under the Federal Trade Commission Act, so that this provision of the proposed bill is unnecessary.

The Bureau of the Budget advised there would be no objection to the submission of this report from the standpoint of the administration's program. Sincerely,




Washington, D.C., April 24, 1963. Re H.R. 3669: To amend the Federal Trade Commission Act, to promote quality

and price stabilization, to define and restrain certain unfair methods of distribution and to confirm, define, and equalize the rights of producers and resellers in the distribution of goods identified by distinguishing brands,

names, or trademarks, and for other purposes.
Chairman, Committee on Interstate and Foreign Commerce,
House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: Further reference is made to your letters of February 22 and March 18, 1963, requesting our comments on the above bill.

In substance the purpose of H.R. 3669 is to provide manufacturers of goods sold under a brand, name, or trademark with a measure of control over the conditions under which the goods are to be resold by jobbers, wholesalers, or retailers. Thus, within prescribed limitations, the right of such a purchaser to resell could be revoked if he resorts to bait merchandising practices or to misleading advertising or if he fails to observe a resale price established by the manufacturer. Appropriate sanctions are embodied in the bill for the enforcement of these provisions.

The outstanding feature of H.R. 3669, of course, is the right of the manufacturer to stipulate the prices to be charged by his customers. At one time such resale price maintenance was permitted by nearly all of the States under statutes enacted by them pursuant to an exemption (Public Law 542, 82d Cong.) from the antitrust laws. In recent years, however, the courts in many of these jurisdictions have invalidated their respective fair trade laws, in whole or in part, on constitutional grounds. Today they are in full force in some 24 States only. The evident plan of the bill is to strengthen the right to practice resale price maintenance by resting it on Federal, rather than State, law.

The demand for such legislation is strong—and we at the Small Business Administration are familiar with the underlying reasons. Small retailers in many lines are being subjected to intensive and relentless pressure from chain organizations. These organizations, with their vast purchasing power and financial resources, can afford to cut prices to levels which their small competitors find impossible or extremely difficult to meet. The magnitude of the resulting problem is not to be underestimated. Many small retailers have already succumbed to the pressure and, unless we can find a remedy for the situation, many more will go under.

Some people take the view that this situation, sad as it is for those whose livelihood depends upon the continuance of small retail shops, is an unavoidable consequence of the free enterprise system. It is said that, to the extent such stores cannot endure the rigors of free and open competition, they must go. I think we should examine that argument carefully.

It is entirely true that our economy was initially characterized by free and open competition. In the early days of our history, when all businesses were small, when all enjoyed equality of opportunity in the market, we actually had such competition. The forces released by it made us the wealthiest nation on earth. Unfortunately we were not diligent in preserving this system. As huge combinations began to form in one industry after another, at an accelerating pace, we were slow to recognize the danger.

By the time we acted, with the institution of the antitrust laws in 1890, much damage had been done. It has not yet been undone. Despite more than 70 years of antitrust prosecution, the giants are more numerous and larger than ever. They are to be found in nearly all industries. It is to be hoped that, if we continde the vigorous enforcement program now being conducted by the Department of Justice, their grip may eventually be broken or at least weakened. But that day lies in the future, probably the distant future.

Meanwhile the small business community must survive. In the conduct of the antitrust program, as in most other matters, an ounce of prevention is worth a pound of cure. The competitive potential of small business is a force in being which must be preserved as one of the most promising means of restoring free enterprise. If the decline of this vital segment of the economy is permitted to continue, the battle we are waging against monopolies and restraints will be lost or at least greatly prolonged.

During the interim period of which I speak we should not expect small concerns to stand up to the giants unassisted. To be sure, an occasional David may step out of their ranks and slay a Goliath. In many respects, however, the small man is at a great disadvantage as regards the large. It is misleading, therefore, to speak of “competition” between the two in the sense that each has an equal chance to prevail.

With these considerations in mind Congress established the various assistance activities now being conducted by the Small Business Administration. This policy of the Government is not to be regarded as an interference with the mechanism of competition but, rather, as a program to counteract the restraints which frequently have been imposed upon that mechanism by big business.

It is against this background that the merits of H.R. 3669 should be evaluated. By virtue of their size alone the chains and other large retail establishments hold overwhelming advantages over the small retailer. As we all know, they buy at quantity discounts which are not available to him. This, together with the volume of their sales, permits cost savings far beyond his reach, regardless of his management abilities. Many of them, not content with these advantages, strengthen their position further by extorting illegal concessions from their suppliers. Since these latter transactions are conducted under cover, accurate information with respect to them is unavailable. There is reason to believe, however, that such concessions are widespread.

It is not surprising, therefore, that small stores can rarely meet the prices offered by their large competitors. This is a problem they have to live with and, considering the circumstances, they have done well. Except where price differentials assume major proportions, small retailers can be counted upon to attract customers by means of superior services, ingenuity in the display of goods, and other merchandising skills and device Their resourcefulness in this respect is attested by the vast numbers of them which have weathered chain competition for many years.

Drastic price slashing is another matter. The leading retail establishments in many industries could, if they wished, price their small competitors out of business. The view bas often been voiced that some of them have, in fact, undertaken to do so. We must ask ourselves whether such predatory price cutting promotes competition or destroys competition. I consider it destructive because it leads straight toward monopoly.

If we accept the premise that our primary goal is to devise a method by which predatory price cutting can be eliminated or at least substantially deterred, we must determine the method by which we can best achieve this goal. In this connection I would strongly advise that the committee give consideration to the possibilities of improving existing remedies against so-called loss leaders. This term, as commonly employed, relates to two distinct practices. In the first of these the proprietor of a store will lower his prices on leading brands in order to attract customers. The sacrifices he makes on such brands are more than offset by profits on sales made from the remainder of his inventory. In the second type of loss leader a chain organization will lower prices on certain products in one locality, in order to put pressure on competitors there, and at the same time maintain regular prices on such products elsewhere.

Innumerable complaints have been received from small retailers injured by loss leaders. Under existing law, however, it is extremely difficult to cope with these pernicious devices. Section 3 of the Robinson-Patman Act makes it a crime to sell goods at "unreasonably low prices" but, since conviction cannot be obtained in any case unless Government sustains the burden of proving beyond a reasonable doubt that the sales were made for the purpose of destroying competition or eliminating a competitor, this provision is of little help.

At one time it was supposed that section 5 of the Federal Trade Commission Act, prohibiting unfair trade practices, could be effectively utilized against loss leader sales. However the Federal Trade Commission is of the opinion, based on enforcement experience, that the section cannot be successfully employed except where it can be shown that the sales were made for the purpose and with the intent of injuring or destroying competition. Such proof is, of course, difficult to obtain.

Similar difficulty is involved in utilizing other applicable provisions of the antitrust laws. Their sanctions cannot be imposed without proof in each case that the loss leader sales did, in fact, result in a tendency toward monopoly or that they did, in fact, lessen competition substantially or produce some other forbidden result.

Perhaps the situation could be alleviated by imposing a ban on sales below cost. Admittedly, such legislation would have limited value because there are indications that many loss leader sales, perhaps most, are conducted at prices which, though well below regular levels, are nevertheless above cost. Moreover, I recognize the difficulties entailed in trying to devise a clear and workable statute prescribing all loss leader sales, and it is not my intention at this time to recommend any specific method of dealing with loss leaders or sales below cost. Rather, my purpose is to point out the scope of the problem which these practices present to small retailers and to emphasize its importance. With respect to the form which loss leader action should take, I would be guided by the views of the Federal Trade Commission.

I trust that you will find the foregoing comments helpful in your consideration of H.R. 3669 and related bills.

The Bureau of the Budget has advised that there is no objection to the submission of this report from the standpoint of the administration's program. With kind regards, I am, Sincerely,

JOHN E. HORNE, Administrator.

Mr. STAGGERS. The first witness at this time will be our colleague from Indiana, Congressman Ray J. Madden, who has asked to appear first because he has other matters he must attend to.

Mr. Madden?



Mr. Chairman and members of the subcommittee, your cooperation in holding these hearings demonstrates that you are much concerned over the devastating methods of merchandising in recent years that is causing great damage to the manufacturers, retailers, and consumers throughout the country.

This bill last year obtained, after lengthy hearings, a favorable report from both the House Interstate and Foreign Commerce Committee and from the Rules Committee. It also obtained a favorable report from a special subcommittee of the Senate Commerce Committee when our Congress adjourned.

Although the leadership was willing to bring it up on the floor of the House, but, on account of the fact that the subcommittee of the Senate had reported it out, but the full Senate comunittee, on account of the rush pending adjournment, did not report it out, and that is the reason why we were unable to consummate the legislation last year.

Obviously thorough study has been given this measure. I respect the judgment of my colleagues who have given this bill their approval. It is a question of life or death for hundreds of thousands of small businessmen. Let us do our duty to them by moving quickly and effectively to make the quality stabilization bill the law of the land.

Basically, the quality stabilization bill offers a major step in curbing dishonest practices that are misleading the consumer in merchandise values. It spells out bait advertising, deceptive pricing, and published misrepresentations of the product as reasons why a manufacturer may protect the property rights in his brand name or trademark.

The public will be helped by the enactment of the quality stabilization law, since the established price and quality symbolized by the brand name will be a standard from which it may judge the competitive values of products for sale. The consumer will be guarded against the unscrupulous operator who uses the honored brand name or trademark to build store traffic at the expense of his more honest competitors, while recouping his loss at the same time on overpriced, inferior, and “blind" merchandise.

This legislation will call for no Government bureaucracy or department to supervise or enforce it.

The law will be 100 percent optional with the manufacturer, retailer, wholesaler, and consumer.

It will provide incentives for quality products to be distributed through quality-conserving resellers.

In our long and critical struggle against communism, the American system of free enterprise must be our major weapon. Business failures in recent years and the growing lack of protection for consumer purchases demand action by this Congress.

We cannot permit the further degeneration of the brand-name system of distribution. We must arrest the growing rate of failure of small business in this country. We must give the incentive to the manufacturer in this country to build toward excellence, and we must protect the consumer from junk merchandise.

The quality stabilization bill covers specific areas in which a manufacturer can control, that is, prevent the unfair use of his own property-his trademark-by the reseller. These areas are:

(1) International misrepresentation as to make, model, size, age, et cetera;

(2) Bait and switch merchandising tactics; or

(3) Deviation from the established price. The manufacturer who elects to use the quality stabilization law will publish the retail price or resale price range governing the sale of his product. He is given this right so that he may protect the quality of the product, the goodwill of his brand name, the ethical reseller, and the consumer. Competition will be promoted—not restricted—by the quality stabilization law, and the interaction of competitive forces will insure that the manufacturer's price represents fair value or else that manufacturer will be forced out of business. Any price established under this law will be at the manufacturer's peril. This is the way the free enterprise system should function.

If a retailer knowingly violates the published policy of the manufacturer by engaging in any one or all of the three specific practices named in the bill, then the manufacturer may revoke the right of that offending retailer to make any further use of the manufacturer's name, brand, or trademark.

The quality stabilization bill is not a one-way street, it imposes an obligation on the manufacturer as well. Specific provisions insure that equity be practiced by the manufacturer in his relations with his resellers and in the enforcement of the act.

Under the Quality Stabilization Act both the reseller and the public will know where each manufacturer stands as to policy and quality consistency. The manufacturer no longer will have the convenient excuse that the cannot protect good resellers against unfair competition.

Essentially this bill is only a confirmation by Congress of the unanimous decision of the U.S. Supreme Court in Old Dearborn Distributing Co. v. Seagram Distiller's Corp., (299 U.S. 183 (1936)) which held that the manufacturer possesses property rights in the goodwill symbolized by his trademark. This bill implements that decision by charting a specific route the manufacturer may use to protect his trademark as it moves along the channels of distribution.


The Quality Stabilization Act would leave the antiprice-fixing provisions of the Sherman Act intact. Any group of manufacturers or wholesalers or retailers who effect collusive price fixing between themselves would be courting prosecution under the Sherman Act.

To underscore that the quality stabilization bill will promote competition it must be emphasized repeatedly that the manufacturer alone must make the basic marketing decision-whether to stabilize

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